Description

Thesis

Part SaaS company, part content streaming platform, Pluralsight defies easy classification, but is a high quality business directly positioned to benefit from the only constant in the work of enterprise technology – an ever increasing pace of change.  After trading down ~50% in the aftermath of a massive deceleration in bookings growth in Q2 (more on that below), Pluralsight now trades at a substantial discount to its software peers. The Company’s path forward and their ability to execute on the opportunity in front of them to become a system of record for the modern IT department is unproven, but they have all the ingredients in place to be multi-bagger over the coming years.  Even if they fall short of this potential, the current valuation allows for solid returns and the Company seems like a good candidate for acquisition by a number of much larger software companies should execution continue to fall short.

 Description and History

Pluralsight bills itself as the technology skills platform.  Founded original as an in-person IT education consultancy, Pluralsight founders had the foresight to abandon traditional face to face training sessions and crowdsource the development of digital content to carefully vetted experts based across the globe.  They build a digital content universe geared exclusively towards up-skilling IT professionals. In its early years Pluralsight sold subscriptions to individual users, but has since pivoted its business model to be >85% B2B. Pluralsight went public in 2018 after receiving funding from Insight Venture Partners and ICONIQ.  Today PS has $331M of TTM billings from more than 17K active customers. IT departments typically pay annual subscriptions ranging from $450 to $780 / head to give their employees unlimited access to thousands of rigorously reviewed and frequently updated courses designed to improve their skills across 4 key verticals – software engineering, systems architecture, cybersecurity, and data science.

  Quality of Business and Opportunity Going Forward

Pluralsight is directly addressing the disparity between the level of technology skills required to keep companies competitive and safe from disruption and the level of technology skills actually possessed by existing in-house IT teams.  Because so many companies face a skills gap and that gap is growing over time, hiring new talent externally is becoming a harder way to solve this problem. Instead, Companies have to rely on “upskilling” their existing talent base. Training content that aligns directly to the technology roadmap of an organization and that can be linked directly to an improvement in individual productivity and use of new coding languages, security protocols, or infrastructure designs is more valuable now than ever before.  Education and training will increasingly be viewed as a strategic investment area worthy of larger budget allocations and more senior management attention than it has been historically. Pluralsight is synonymous with that training.

Subscribers love Pluralsight because the quality of content available on the platform is unmatched elsewhere.  Users feel confident that they are learning from true experts in every subject and they appreciate that the platform allows you to take a course from start to finish or easily search for the answer to a particular question that comes up while working on a specific real time project (unique to a YouTube based alternative).  The Pluralsight library has >6500 classes and content quantity in key areas like public cloud is growing >100% yoy. User engagement has also been increasing as shown in the charts below. The average user now spends nearly 1 hour / month using Pluralsight up nearly 15% from last year.

Pluralsight is perceived as a better option to competitors because of more than just content.  Subscribers note that Pluralsight has the most user-friendly interface thanks to interactive and adaptive features like practice problems that sit alongside videos and assessments whose questions automatically adjust to each user’s skill level and the specific needs of their role as defined by their manager.  This does not exist elsewhere

 Traditionally most specialized IT training had been done through classroom-based instructor led training which is less effective, less enjoyable, and considerably more expensive than the whenever / wherever, all you can eat offering from Pluralsight.  A single in-person course might cost $3-5K per student before travel expense while Pluralsight’s ARPU is around $300 / year.

 Online competitors like LinkedIn Learning or SkillSoft lack the technological specificity and cutting-edge timeliness of Pluralsight, while Udemy and Coursera have content that is disorganized, not properly vetted by experts, and not easily customized.  Other competitors like A Cloud Guru and Data Camp offer high quality complementary content for narrower subject matters but do not cover the whole IT stack. None of these competitors have the same assessment and analytics capabilities that Pluralsight envisions becoming increasingly important to technology leaders taking a data driven view on training and long-term resource planning

 The public cloud providers have chosen to partner with Pluralsight to produce content and create role certifications for the use of their platforms in a way that they have not done with Pluralsight’s smaller peers.  Google and Microsoft both pay Pluralsight to give access to their platform for free to GCP and Azure users. The cloud providers recognize the single largest barrier to faster adoption of their products is the technology skills gap faced by their customers.  While all 3 public cloud players host their own educational content, education reps from these companies admit that Pluralsight is a better learning resource for customers seeking the most comprehensive training. 

 Pluralsight authors share a similar and very positive perspective to Pluralsight users.  They appreciate the resources that Pluralsight invests into their success including high quality production tools, rigorous editing committees, and constant feedback from end users.  Most authors I spoke with do not think they’d be able to replicate the same quality content outside of the Pluralsight ecosystem. Except for the most popular authors who reportedly make greater than $1M annually, most authors have full time jobs beyond Pluralsight.  Part of what is compelling to them about contributing to the platform is that the Pluralsight brand is so closely associated with high quality, expert produced content that being able to call yourself a Pluralsight author is a valuable credential for a resume or an interview. 

 While in theory the most prominent authors could disintermediate Pluralsight by hosting their content on YouTube or their own website and monetize through advertising or standalone subscriptions, many view this as adding too much complexity beyond their “day job” and feel that the quality of their lessons would be diminished without access to the PS review boards, content design interfaces, and assessment engines.  They also fear that they’d lose discoverability in that their content would stand next to dozens of other similarly titled courses on the Google or YouTube search and they wouldn’t be able to distinguish the relative quality of their content versus less well vetted alternatives

Adoption of Pluralsight in large enterprises remains very low (7% “seat share”) creating a large opportunity for future growth.  But in order to realize the full potential for adoption within these customers Pluralsight needs to win over senior tech leadership with a greater emphasis on analytics, diagnostics, and results measurement.  This requires a different sales motion than what has made the Company successful historically. The early signs of their ability to execute on this are positive albeit inconclusive.

 Given such a positive user experience, Pluralsight has managed to win customers at nearly every large enterprise. The Company estimates that they have subscribers at 70% of Fortune 500 companies.  Given this wide breadth of usage, Pluralsight’s growth going forward will depend on increasing depth of usage. There is a tremendous opportunity for upsell within existing customers with only 7% of Fortune 500 IT workers using the service.  An increase in this penetration rate will be the key driver for Pluralsight to become a multi-billion dollar business

 Pluralsight got to its current position primarily through grassroots adoption by highly-motivated, self-starting IT professionals and through support from within the HR organization.  As a result, most companies that pay for their employees use of Pluralsight treat it as little more than a “nice to have” perquisite. Some portion of the Fortune 500 usage is even coming from individuals paying out of pocket or through one-off expense approvals from project managers (this is evidence of the quality of the product, but not necessarily of its stickiness, resilience in an economic downturn, or ability to grow seat share).  In these environments there is little to no mandated usage and advanced features go unused. 

 Despite this, the product is so good that Pluralsight has managed to achieve very strong upsell rates until hitting a wall in Q2.  The problem is that there is likely an upper limit to adoption of Pluralsight within these types of organizations and that upper limit leaves less room for growth than what you’d think based on a 7% penetration statistic.  Also, without having some sort of top down imperative to use Pluralsight, the percent of licenses being consumed by true active users within any Company is likely to be fairly low. Even HR managers who love Pluralsight and think the ROI is compelling, admit that maybe as many as half of users in their company do not regularly log into the platform.  Over time this seems likely to hamper Pluralsight’s growth potential because managers will see that licenses are going unused and they will take those idle licenses and give them to other people in the organization. This limits the upsell of additional seats or, even worse, they will retire the unused licenses back to Pluralsight thus driving higher churn.  On an overall basis, Pluralsight has attractive net revenue retention rates of 128%, but gross revenue retention is low relative to most SaaS companies.

 The key for PS to drive deeper enterprise adoption and lower churn will be getting IT organizations to adopt Pluralsight as part of a more strategic and top-down approach to skills enhancement rather than as merely a “nice to have” overseen by the HR department.  Companies that use Pluralsight strategically will take advantage of the full suite of features. They will use assessments to understand the skill levels of their existing teams and work backwards from 5-year tech roadmaps to see which emerging programming languages or security stands they will need to adopt and then assign the completion of corresponding Pluralsight certifications to individual teams to ensure their ability to deliver these new technologies.  They will also decide which hard skills to hire for externally by looking at the Pluralsight dashboard to see the deficiencies of their existing team. They might even use a Pluralsight designed assessment to then vet those external candidates. Management’s vision is for Pluralsight to become the central dashboard that IT managers use to measure the skills of their team and track their performance towards specific and customized goals. They want to be as central to the day to day operations of the IT department as Workday is to the HR department or Salesforce is to the sales team, not merely a content portal for employees to enjoy at their own convenience.

 Pluralsight’s recent acquisition of GitPrime seems to be a logical step forward towards that reality.  GitPrime’s integration with Pluralsight will allow managers to assess how specific learnings on Pluralsight have translated into better coding efficiency and ROI.  Alternatively it will monitor coding performance of the entire team and be able to make proactive recommendations about training modules that will most directly enhance each individual’s day-to-day throughput

 Adding these administrator focused tools is the focal point of the Pluralsight product roadmap.  Over the past year they’ve made significant progress towards this goal by completely revamping the analytics dashboard for managers (less on time spent and more on skills learned) and creating the concept of RoleIQ and SkillIQ certifications so managers can clearly see how individual or aggregate talent compares against competitor benchmarks or against what is needed to achieve specific deliverables in their long-term tech road map (e.g. run NoSQL servers on AWS or build an AI based recommendation engine)

 While early, Pluralsight is already making progress in transitioning their customers to a more strategic use of their product suite.  In addition to building out more managerial analytics that solidify the connection between content consumption and actual skills growth or, better yet, production efficiency, Pluralsight will have to change the to go to market approach of their sales team.  Getting in the door with SVPs, CIOs, and CTOs and speaking with a sophisticated ROI focus will be critical and different than what would have worked when your audience was the semi-technical learning manger in the HR department. Management acknowledges the importance of this and has already begun upgrading their sales talent and forming new partnerships with top systems integrators / consultants like Accenture, Capgemini, and Fujitsu.

 While it is way to early to tell how PS’s newly appointed Chief Revenue Officer, Ross Meyercord, is planning to drive towards these goals, his background as the former CIO and also senior sales leader at Salesforce (as well as a long prior career as an Accenture Partner) aligns perfectly to these objectives.

 Pluralsight’s vision to be a strategic System of Record for the entire IT organization resonates with customers.  Nearly every Pluralsight administrator I have spoken with at companies have yet to embrace this approach say they would like to see their organization move in this direction.  Pluralsight thinks that only around 15% of their enterprise customers have embraced this strategic approach to date and their goal is for 100% over time. Companies that have reportedly gone all in on Pluralsight include Cerner, Fujitsu, Citrix, and Westjet.  If other enterprises follow in these footsteps, Pluralsight can easily have several billion dollars of revenue

What Went Wrong

In August Pluralsight reports Q2 billings growth of X% versus Y% in the prior quarter and consensus estimates of Z%.  As one former Pluralsight sales leader explained to me, “it’s a miracle Pluralsight got by without having a blow up like this sooner  The fact that it took so long just made it that much more painful.” Historically Pluralsight had not invested heavily in making fundamentals of sales force management like funnel racking, territory mapping, upsell strategy, etc. a core competency.  Part of that relates to the origins of the business as a primarily B2C platform whose extensive library effectively sold itself. There’s an article still floating around from 2014 Pluralsight’s founder and CEO argues that sales people don’t have to be paid commissions (https://www.inc.com/aaron-skonnard/why-sales-commissions-don-t-work-in-the-long-run.html).  Pluralsight eventually came around to paying commissions, but the organization never really had a sales leadership team in place to operate at this scale.  Also, sales people had such as easy time upselling additional seats to organizations where the original adoption was grass roots that a playbook for he high level conversations needed to drive department went adoption lagged the capabilities being built into the platform.

 I think a big part of these issues can be fixed just by putting in place sales leadership with the appropriate frameworks and controls necessary to drive discipline relative to budgets and methodical planning around prospecting and upsell rather than waiting for the order to come through door or otherwise jacking prices for a relatively underpriced product to meet the quarter.  I believe much if not all of the problems that led to Pluralsight’s fall from grace are fixable with experienced management and Ross Meyercord seems to fit the bill. More importantly, I think none of the problems that led to Pluralsight’s fall from grace have anything to do with a deterioration in product quality, a worsening of competitive environment, lack of white space for future growth, or a wrong turn in the product roadmap.  On all of those fronts, I think Pluralsight’s execution has been as good as their sales execution has been bad.

Valuation and Returns

Pluralsight’s 2022 plan calls for $1B of bookings and operating margins of 22%.  In order to achieve this level of bookings Pluralsight would have to grow at a ~40% CAGR over the next 3 years.  Assuming the Fortune 500 penetration statistics above are a reasonable proxy for the broader Fortune 5000 market into which Pluralsight sells, the Company could achieve those goals by increasing seat share from 7% to 21% without any upsell or pricing actions.  A more likely outcome would be for Pluralsight to drive ~5% annual price / mix through the upsell to enterprise grade product tiers and add-ons like GitPrime. In that case, the penetration requirements are even less demanding at only needing to go from 7% to 18%. 

 If Pluralsight were to achieve this goal it would be generating $1.25 / share in free cash flow.  At a 5% forward free cash flow yield, that would translate to a share price of $25.50 at the end of 2021 or a 17% IRR from the current share price. 

 Importantly, there would still be a very long-runway for future growth especially if the Company can drive the strategic adoption via CIO sponsorship discussed above.  As the Company continues to grow beyond this point, there should be room for further margin expansion. It seems unlikely that company would trade at a 5% FCF yield with so much revenue and margin trajectory ahead of it.  At a steady state, margins near 30% seem achievable. If revenue growth decelerates to 25% annually from 2022-2025 and margins expand to 30%, FCF would approach $3.50 / share. At a 7% forward FCF yield, that would translate to a share price of $54 at the end of 2024 (including ~$4 of accumulated FCF) or a 24% IRR from the current share price

 As discussed above, I think the attractiveness of Pluralsight as an acquisition candidate to a number of much larger companies like Microsoft, Amazon, Google, Salesforce, ServiceNow, Workday, and Cornerstone provides a (difficult to quantify) level of downside protection.  Recent acquisitions in the SaaS space have been done at EV / Fwd Revenue multiples of ranging from 5.0x to 16.1x fwd revenues at a median of 8.7x

Risks

1)     Inability to keep up with the pace of technological change resulting in stale content and eventually share loss to alternative content venues such as YouTube or boutique subject specific subscription content aggregators (e.g. A Cloud Guru, Know Before)

2)     Inability to execute go to market strategy to drive buy-in from the IT department versus the HR department which is critical to garnering higher seat share

3)     Recession risk – Pluralsight in its current more is not a system of record and it lacks the stickiness of some of its SaaS comparables.  While no company would want to slow the pace of upskilling within their IT department in a vacuum, HR department training budgets could easily be a casualty in a recession-induced austerity program

4)     Cultural backlash within existing salesforce new leadership team leads to defections and a further deceleration in bookings

Catalyst

Catalysts

1)     Gradual rebuilding of credibility with the investment community after the sudden and severe deceleration of bookings in Q2’19

2)     New Chief Revenue Officer unveils new go to market strategy to drive greater engagement and buy-in from key decision makers in the IT organization that can mandate a broader roll out of the Pluralsight platform than what’s possible under IT stewardship.  As Pluralsight gets more enterprises to go “all-in” and (if) the experiences are positive, these early adopters should be valuable case studies to make every additional “all-in” implementation easier than the last

3)     Continued improvement and broadening of the product suite to give IT administrators greater visibility into the ROI of their implementation and the actual uplift in skills afforded by Pluralsight

4)     Ability to cross sell GitPrime to a significant portion of existing Pluralsight users could be a source of near term upside to consensus estimates looking into 2020